The trouble with nostalgia

In another sign of pain in the energy sector, Peabody Energy (BTUUQ) recently filed for bankruptcy.

Poor company-specific decisions, such as the 2011 debt-fuel acquisition of Australian coal producer McArthur Coal, contributed to the decline in my view.

However, the bankruptcy filing was also the denouement of a long secular decline in the coal industry driven by the substitution of natural gas for coal as a fuel for electricity generation.

In my opinion, another challenge is the increasingly unfavorable and costly regulatory environment for the production and consumption of coal.

Steady Decline

Following the 2008 financial crisis, Peabody Energy reached a peak stock price at the beginning of April 2011, and then began an unrelenting decline that finally ended last month.

During this decline, countless numbers of investors, in my view, were lured in by hopes of catching a rebound.

Regardless of whether Peabody was technically a value stock, investors saw significant value in the shares of a company whose stock price had tumbled, yet remained a leader in its industry, and paid a dividend.

Nostalgia Risk

The obvious lesson here in my view is to avoid being nostalgic about the level at which a stock once traded. Look towards the future, never back into the past.

Too much debt can bankrupt a company. Fraud can incite panic among shareholders.

Shifting Ground

Blockbuster Video once operated over 9,000 stores in the US.

Seeing a movie at home entailed driving to the local strip mall, hoping that the new release that you wanted to see was still available and not already rented out, and then waiting in line to pay a cashier for your rental.

New Players

Then Netflix (NFLX) came along, offering a more convenient and inexpensive options. Blockbuster filed for bankruptcy in 2010.

In my opinion, one of the reasons individual and professional investors have such a difficult time beating the performance of index funds is that index funds have no nostalgia for how things once were.

Takeaway

Index funds don’t care about how big a company or an industry used to be, and don’t try to overweight it to catch a rebound.

Similarly, index funds don’t discount the wisdom of the crowds in regards to the future financial prospects of companies.

The old admonition against catching a falling knife still holds true. Just ask Peabody investors.

Author profile

HCB Investment Management

I am Harry Briggs of HCB Investment Management a registered investment advisory firm that I founded in 2005. My portfolio on the Covestor platform leverages my previous experience as a natural gas options trader and risk manager in the energy trading industry. During that time, I began to hone my strategy, which focused on the impact of energy price volatility on the valuations of exploration and production companies.

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